Banks as Liquidity Providers: An Explanation for the Coexistence of Lending and Deposit-Taking
Anil K. Kashyap
University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER)
Raghuram G. Rajan
University of Chicago - Booth School of Business; International Monetary Fund (IMF); National Bureau of Economic Research (NBER)
Jeremy C. Stein
Harvard University - Department of Economics; National Bureau of Economic Research (NBER)
Journal of Finance, Vol. 57, pp. 33-73, 2002
What ties together the traditional commercial banking activities of deposit-taking and lending? We argue that since banks often lend via commitments, their lending and deposit-taking may be two manifestations of one primitive function: the provision of liquidity on demand. There will be synergies between the two activities to the extent that both require banks to hold large balances of liquid assets: If deposit withdrawals and commitment takedowns are imperfectly correlated, the two activities can share the costs of the liquid-asset stockpile. We develop this idea with a simple model, and use a variety of data to test the model empirically.
Accepted Paper Series
Date posted: November 15, 2003
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